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What does the Term "Hedging" Mean?

Hedging

By entering into an offsetting position on the derivatives market, futures transactions are used to hedge existing cash positions (such as, for instance, securities portfolios, equities, bonds), or cash positions planned in the future. In this case, profits from the futures position (largely) offset the unrealized losses in the cash position.

The term "hedge" describes a fence or barrier that the trader uses to protect his position. In doing so, he becomes a "hedger".

Hedging = Offsetting position to the cash position

Profits and losses are offset in the overall position (futures and cash position). The hedger acts as if he had sold the bonds.

Hedging with futures means, that shares or bonds in the portfolio of the hedger are not sold.

One reason for this could be, that the hedger`s own position is too large to be sold, or that a sale is not possible due to legal reasons.

Instead a contrary position on the futures and options market is required, which will nearly always make a profit when the cash position makes a loss.

Example: Hedging a bond portfolio

Profits and losses are offset in the overall position (futures and cash position). The hedger acts as if he had sold the bonds.

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